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Chapter 10
Developing an Approach to Total Compensation (p. 356 – 365) Total Compensation – monetary and nonmonetary rewards offered to employees Nonmonetary compensation – includes many forms of social and psychological rewards (recognition and respect, enjoyment from doing the job, opportunities for self-development) Monetary compensation – direct payments (salary, wages, bonuses) and indirect payments (payments to cover benefits and services) Pay Mix – the way an organization distributes pay among all elements of total compensation, including monetary vs nonmonetary elements, is referred to as the pay mix. Direct Compensation - *Base Pay – basic monetary compensation received, usually as wages or salary *Wages – payments calculated on the amount of time worked *Salary – consistent payments made each period regardless of # of hours worked *Variable Pay – compensation linked to individual, team, or organizational performance Indirect Compensation - “Benefits” Pay Secrecy – secrecy is the norm, managers get fewer questions about inequitable pay. However, employees may have inaccurate information or misperceptions about pay. Executive Compensation – 20 Year Comparison *CEOs have seen their pay increase 514%, or 12 times the rate of inflation *The federal minimum wage has increased only 36% and median household income has increased 43% The Strategic Importance of Total Compensation (3 Objectives) - *Attract and retain the talent required for sustainable competitive advantage *Focusing employee energy on implementing the company’s competitive strategy *Improving Productivity (controlling costs) Links with Other HRM Practices – *Recruitment and Retention *Training and Development *Performance Measurement The External Environment – *Labor market conditions – pay level (external), pay mix (internal) *Legal and Social considerations – legislation, comparable worth *Labor unions – union contract, wage clauses 2 Reasons Certain Industries Pay More 1. Industry Capital Intensity – ratio of capital to total expenses. Industries where capital costs are high and labor costs are a small portion of total costs, employers can pay more (i.e. energy, automated manufacturing, construction). 2. Industry Unionization – percentage of organizations in the industry that are unionized. When an industry is heavily unionized (transportation, manufacturing, construction), all organizations have to pay more for their employees. LEGAL CONSTRAINTS AND SOCIAL CONSIDERATIONS (p. 365 – 368) Fair Labor Standards Act of 1938 *Minimum wage requirement *Child labor prohibited (under 14 years old) *Requires overtime payments for non-exempt employees *Requires overtime (1 ½) pay for hours over 40 *Requires compensatory time at overtime (1 ½) pay rates *Exempts highly paid computer workers FLSA Employee Classifications *Exempt – employers not required to pay overtime to (executives, administrators, professional (learned or creative) employees, computer employees, outside sales persons) *Non-exempt – must be paid overtime (hourly, salaried non-exempt) Davis-Bacon (1931) and Walsh-Healy (1936) Acts *Federal construction contractors required to pay prevailing wages to laborers and mechanics Living Wage Laws - Enacted by some local governments to ensure pay reflects cost of living Equal Pay Act (1963) - Amendment to FLSA that prohibits gender-based wage discrimination for “substantially” equal jobs ESTABLISHING THE INTERNAL VALUE OF JOBS (p. 372 – 379) Pay Structure – combines job evaluation info and info about market pay rates to establish a policy that specifies base pay of each job Job Evaluation – procedure for establishing the relative internal worth of jobs Internal (Individual) Pay Equity – employee perception that they’re paid fairly compared to others in the organization Job-based Pay Structure – pay received is primarily determined by the job held Compensable factors – dimensions of work an organization chooses to use when establishing the relative value of jobs Salary Surveys - Market information gathered about what other employers pay—validation of external equity in valuing jobs in an organization. Four Job Evaluation Methods *#Job Ranking - Places jobs into a rank order according to the perceived overall value or importance of the job. *#Job Classification - Groups jobs into a set of classifications based on the job descriptions, and then ranks the jobs that are found within each classification. Jobs classified as being similar are usually referred to as being in the same job grade. *#Point-Based - Places jobs into a rank order according to the perceived overall value or importance of the job. *#Competency-Based - Emphasizes competencies needed to perform job rather than job duties. Encourages training and development Point Factor Rating Method *Compensable factors - The dimensions of work that an organization chooses to use when establishing the relative value of jobs. *Standardized factors (Hay Guide Chart-Profile) - Problem solving, know-how, accountability *Custom-designed factors - Factors developed by an organization to align its pay system with its strategic objectives. *STEP 1: Select Compensable Factors *STEP 2: Assign Factor Weights *STEP 3: Define Factor Degrees *STEP 4: Establish the Degree of Each Factor Present in Each Job *STEP 5: Calculate Job Values Competency-based Job Evaluation *Emphasizes competencies needed to perform job rather than job duties *Often used with broadbanding approach. Broadbanding refers to the use of pay structures that have very few (3-5) pay grades. *Promotes individual development and growth through lateral moves *Hierarchical, bureaucratic and rule-driven corporate cultures may make implementation difficult. Skill-based Pay - Rewards employees for the range, depth, and types of skills they’re capable of using, regardless of whether the job they currently hold requires the use of those skills. USING EXTERNAL MARKET RATES TO SET PAY LEVELS (p. 379 – 383) External Pay Equity - Exists when employees feel they are being paid fairly relative to what people in similar jobs (or with similar competencies) are paid by other employers Create a pay structure that achieves external pay equity by: 1. Determining pay rates in the external market 2. Establishing the market pay policy 3. Setting the organizational pay policy Benchmarks jobs – jobs commonly found across a range of organizations that involve essentially the same work and responsibilities regardless of company Market Pay Policy – established by plotting pay rates against the evaluation points that the company assigned to the benchmark jobs Organizational Pay Policies *A lead policy indicates that the organization intends to pay somewhat above the market rate in valuing employees as a competitive advantage. *A match policy sets the organization’s policy line at the middle of the market. *A lag policy is where the organization intentionally pays below the market. ACHIEVING INDIVIDUAL PAY EQUITY (p. 386 – 387) Red-Circled Employees - An incumbent (current jobholder) who is paid above the range set for the job. Indicates that the person’s pay is frozen and that he or she should not be offered any more pay raises. Green-Circled Employees - An incumbent who is paid below the range set for the job. This indicates the person needs a pay adjustment to bring the pay up to at least the pay grade’s minimum. OTHER Pay Equity (Comparable Worth) Policies - Based on race/gender differences in “true worth” of nonidentical jobs used by some state and local governments and some unions Key Pay Decisions #Internal/external equity > Distributive justice > Labor Market > Individual equity #Fixed/variable pay #Performance versus membership #Job/individual #Egalitarianism/elitism #Below market/above market #Centralized/decentralized #Monetary versus nonmonetary rewards #Open/secret #ST/LT #No employment security/high employment security How Employees Reduce Inequity of Pay *EE feels over-rewarded – increase inputs (time, effort) to justify higher rewards *EE feels under-rewarded – decrease inputs *Change their compensation - form a union, file a grievance, leave work early *Rationalize that inequities are justified *Leave the situation by quitting *Steal from company *Choose a different comparison Integrating Compensation in Mergers and Acquisitions *Portfolio approach – maintain separate premerger plans from the original businesses *Blending approach – choose the best elements from each *New system approach – develop new system to suit the new organization *Assimilation – assign legitimacy to one culture and expect assimilation by members of the other Expatriates – Professionals sent to a foreign country to work *Balance sheet approach - Provides a level of net spendable income in the new destination similar to that received in the previous (usually home) location. *Expenses incurred by expatriates are sometimes paid by the employer: Goods and Services, Housing, Income Taxes, Shipment and Storage, Reserves (savings, benefits payments, investments, education expenses) Pay Compression - A situation in which pay differences among individuals with different levels of experience and performance in the organization becomes small. Employee Benefits *Public Protection Programs - Legally required (Social Security, unemployment, workers’ compensation) *Private Protection Programs -Voluntary for employers (Health care, life insurance, disability, retirement) *In 1929: benefits were 5% of total pay *In 2000: benefits were 30% of total pay (about $15,000 per employee) *Relative Value - Employees may view benefits as entitlement. Employees differ on the relative value they place on particular benefit. Chapter 9 Chapter 11